LANDLINE
JUNE 2009
SELF-EMPLOYMENT TAXES AND INCOME TAX PROJECTIONS
Why is it that the self-employment tax is much higher than my income
tax?
As a self employed individual, you owe self-employment tax on your net earnings (net income, Form 1040 Schedule C) , in addition to federal income tax. Self-employment tax is actually Social Security and Medicare tax, otherwise known as FICA. Employees pay half the required amount based on income and their employer pays/matches the other half. Self-employed individuals, however, are required to pay both sides themselves, double what an employee pays on the same earnings. This system guarantees self-employed individuals the same access to benefits as employees (social security checks).
Since the Self-employment tax (SET) is taxed on net business income, if you have little or no other income on your tax returns, the SET will be much higher than your income tax since the income tax is based on income less your itemized or standard deductions and less the deduction for exemptions.
When paying your estimated taxes (quarterlies), you need to account for the SET as well as the income tax.
How do I know how
much in estimated taxes (quarterlies) I should be paying?
The government wants to get their share of a self-employed (owner/operator) individuals’
current income, somewhat like an employee (company driver) pays their income taxes throughout the year via income tax withholding. The self-employed owner/operator pays their taxes throughout the year via estimated tax payments (quarterlies).
For the current year, we set up the quarterlies after preparing your income tax return for the prior year. The quarterlies are based on the prior years’ taxes (income and SET) and adjusted for depreciation differences.
But now is the time to verify if what is being paid is correct. What you now need is tax planning and that starts with an income tax projection.
You now have almost six months of operation for the year,
and it is more than enough income and expense information to project your
profit and loss for the rest of the year.
As a self-employed person, you need to know where you stand before the
end of the year in order to make financial decisions. Will you owe money to the IRS on
Though your records should be looked at by your tax preparer throughout the year so that he can spot potential problems or adjust your estimated taxes, a tax projection based on your current operating results will best indicate your tax position going forward. We also suggest your tax projection be updated based on nine months of operations.
This article has been presented by PBS Tax & Bookkeeping Services, a company that has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact us at 800-697-5153.
Please remember everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.